U.S. stocks: Roller-coaster ride will continue

After down week, Wall Street may not get any relief from volatility

By

KateGibson

NEW YORK (MarketWatch) — U.S. stocks in the coming week likely will face more of the European-driven volatility that’s bounced the Dow Jones Industrial Average on a series of triple-digit swings over the past six sessions.

“Europe is the dominant story that continues to be behind the volatility; there is not a clear path to recovery there that has led to making the market nervous,” said Brad Sorensen, director of market and sector analysis at Charles Schwab.

On Friday, Wall Street’s nerves were further frayed as worries intensified about Greece’s debt crisis after the European Central Bank said its top economist Juergen Stark had resigned from its executive board, and Bloomberg News reported the German government was readying contingency plans to safeguard its banks in the event of a Greek default.

The Dow Jones Industrial Average
DJIA, -0.05%
fell 303.68 points, or 2.7%, to 10,992.13, leaving it with a weekly drop or 2.2%.

Down 0.5% for the week, the Nasdaq Composite Index
COMP, +0.15%
shed 61.15 points, or 2.4%, to 2,467.99.

As nervous investors fled equities for perceived safer havens, U.S. Treasury yields dropped to historic lows, with the benchmark 10-year yield
TMUBMUSD10Y, +0.72%
declining to 1.8976%, the lowest on record in Fed data going back to 1953. The U.S. dollar hit a six-month high against the euro
EURUSD, -0.0254%
which dropped to a low of $1.3697 as investors worried about the euro bloc’s economy at large.

Silver lining?

Given the negative sentiment, it doesn’t take much in the way of good news to push the market higher, and even modestly positive events can have an impact, said Sorensen, pointing to Wall Street’s rise Wednesday after a German court cleared the nation’s participation in the euro bloc’s rescue fund.

Domestically, U.S. economic data in the coming week is expected to show weak but continued growth, and given the dearth of corporate results “one-off events will drive the market over the next week or two,” said Sorensen.

Investors will be getting reads on consumer sentiment, retail sales and a regional gauge from the Philadelphia Federal Reserve.

The new week will likely have further analysis and political debate over President Barack Obama’s proposed a $447 billion jobs plan, with tax cuts making up for more than half of its estimated cost.

Obama made his proposal to a joint session of Congress Thursday night, following a speech by Federal Reserve Chairman Ben Bernanke during the day.

“They essentially joined forces with the aim to deter lawmakers from prematurely tightening fiscal policy,” said Beth Ann Bovino, a senior economist at Standard & Poor’s.

The president’s proposed mix of infrastructure spending, subsidies to local governments and slicing in half payroll taxes paid by workers and small-business owners would expand GDP growth next year, economists expect.

“Many of the president’s proposals are unlikely to pass Congress, but the most important have a chance of winning bipartisan support,” wrote Zandi in his analysis.

Mark Chandler, global head of currency strategy at Brown Brothers Harriman, also saw a boost to economic growth -- and potentially, the U.S. dollar.

“One direct implication of his package on the outlook for the dollar would be to remove some of the burden from the Federal Reserve and in time potentially reducing the need for more aggressive monetary policy actions,” said Mark Chandler, global head of currency strategy at Brown Brothers Harriman.

Less-great expectations

Expectations for U.S. economic growth are lower than three months ago due to higher energy costs, supply disruptions from the March 11 earthquake and tsunami in Japan and the abnormal weather throughout parts of the United States.

Economic growth in the second half of the year is now expected to be about 2%, down from prior estimates of as much as 4%, with the level of growth slowing to the point where economists have begun questioning the economy’s ability to withstand unexpected hits.

“When people say we’re raising recession odds to 50-50, what they are really saying is the economy is less prepared for any type of external shocks — you couldn’t forecast 9/11 10 years ago, you couldn’t forecast a tsunami in Japan,” said Hank Smith, chief investment officer at Haverford Investments.

If the U.S. economy were growing at 4%, Europe’s sovereign debt crisis would not matter quite as much. As things stand, “we can’t carry Europe on our shoulders,” said Smith.

Should Europe’s economy compress, U.S. corporations would get hit, given about half of the revenue generated by the S&P 500 comes from overseas, and roughly 50% of that from Europe.

Of the 498 of the S&P 500 that have reported second-quarter earnings, 71% have exceeded expectations, according to Thomson Reuters analyst Jharonne Martis.

On Tuesday, Best Buy Inc.
BBY, +0.87%
s expected to report quarterly results, followed by Pall Corp.
PLL, +8.82%
the following day. Blackberry maker Research in Motion Ltd.
RIMM
will release its latest quarterly results on Thursday.

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